Its not clear if dipping tax collections have anything to do with it, but the countrys largest retirement fund just got a shocker from the revenue authorities.

The Central Board of Excise & Customs has slapped a penalty notice on the Employees Provident Fund Organisation (EPFO) for evading service tax, arguing that it provides employers fund management services. Fund management falls under the definition of banking & financial services, which are taxable.

In its notice, CBEC argued that the organisation evaded service tax of Rs 461 crore from 2004-05 to 2007-08, on which penalties would be levied.

The total tax demand is expected to be around Rs 1,200 crore, factoring in those penalties along with tax dues for 2008-09 and 2009-10. CBEC has also asked why EPFO shouldnt be penalised for not registering as a service taxpayer and not submitting quarterly returns for tax payments.

The tax demand originated from an inquiry initiated by the CBECs Bangalore office that asked EPFO why it should not be liable to pay service tax on the administration charges collected from employers.

We replied with the legal opinion we obtained and believed that the chapter was over. But internally, CBEC transferred the case to Delhi and without any show-cause notices, the board sent us a penalty notice, a senior EPFO official told FE.

The labour & employment ministry, under which EPFO functions, has sent off a strong missive to the finance ministry protesting the move. The EPFO runs social welfare schemes mandated by an Act of Parliament. It does not provide any commercial service, a senior labour ministry official insisted.

Experts, however, differ. Service tax has been levied on banking & financial services since 2001, under which pension fund management was explicitly included.

In the absence of any exemption granted to a public body like EPFO for providing social security, the tax authorities seem to have a valid case, said PwC ED Sachin Menon.

Even as it gears up to appeal against the CBEC notice, EPF officials are expecting a long-drawn battle, which throws up other issues. One, the EPFOs balance sheet is based on actuals, so it cant possibly create a provision for the service tax liability.

Secondly, it is mulling passing on the liability, if upheld, to employers. We cant absorb it, so the only option may be to revise the administration charges paid by employers to EPFO, presently.